As 2degrees and Orcon geared up for their official launch as "2degrees" today, following a $1.32 billion merger deal, chief executive Mark Callander talked to the Herald about how the new company will operate, and some of the key areas it's targeting for growth.
The Commerce Commission approved the deal on the basis it would enhance competition. Orcon Group owned a fibre network and did most of its business in fixed-line broadband. 2degrees' strength was in mobile. Together, they would make a stronger challenger to Spark and Vodafone.
Today, Callander offered fresh details, including:
• 2degrees will become the sole brand, with sub-brands like Orcon, Slingshot and Flip phased out "as soon as possible" - which in practical terms will be over the next 12 months
• 2degrees' strength has been in consumer mobile. Callander says he will look to use Orcon's presence in the corporate market to boost 2degrees' presence in the higher-yielding business market
• Fixed-wireless broadband - where 2degrees has so far been relatively quiet - will become a big area of focus as 2degrees rolls out 5G
• 2degrees and Orcon Group each had IPO plans before they entered merger talks, but listing plans are "off the table" for the new operation
• Orcon Group is Sky TV's provisioning partner for the new Sky Broadband. This arrangement will continue post-merger, Callander says. While a 2degrees-Sky merger has been rumoured, Callander says the new owners' focus is totally on growing telco market share
• 2degrees mobile customers will be offered bundled electricity plans
• 2degrees won't follow Spark and Vodafone NZ with a bid to sell its celltower network
• 2degrees won't make any Spark Sport or Lightbox style content play. Callander says it will stick with provisioning Sky Broadband, and wholesale deals for Sky's Neon and Spark Sport Now
• Callander has moved from Orcon Group's building to 2degrees' recently opened new headquarters in central Auckland. As many of the combined operation's staff as possible will be moved under one roof
• 2degrees' new board of directors - which will be chosen by ultimate owners Macquarie Group and Aware Super - has yet to be named. An announcement is expected in the next couple of weeks.
"The businesses are both incredibly successful on a standalone basis. But we believe they will be much stronger together," Callander says.
"They're very, very complementary in nature. So we've got a focus [from Orcon Group] that has been historically a fixed-line business with a significant fibre infrastructure asset, while 2degrees has a significant investment in mobile infrastructure
"Traditionally, 2degrees has been very strong in the consumer market. But we see the opportunity to have more success in markets that have been under-penetrated historically - particularly in the business market segment, pushing up to large enterprise and government. That has been an area where Vocus [aka Orcon Group] has been historically quite successful, leveraging our fibre infrastructure base."
2degrees had some 1.5 million mobile customers going into the deal, to Spark and Vodafone NZ's roughly 2.5m each.
The merger won't nudge up the headline figure in itself. Orcon brings just 40,000 mobile connections to the party, via a wholesale or "Mobile Virtual Network Operator" (MVNO) deal with Spark, which will now be wound down.
But Callander sees mobile growth in consumer and business, through different mechanisms.
In the build-up to the Commerce Commission's decision, economist and AUT senior research fellow Richard Meade said a 2degrees-Orcon merger could goose competition in the power market too. Since buying power retailer Switch Utilities in 2018, Orcon has offered its landline customers bundled electricity deals.
Today, Callander said 2degrees' mobile customers will get offered bundled electricity deals, too. That should add to its appeal for consumers and small business customers.
In the business mobile market, it will be a case of leveraging Orcon's larger presence at the top end of town (it has some 1600 Government, enterprise and wholesale customers) to expand 2degrees' presence in the higher-yielding post-paid market.
"We want to succeed in the high-value market segments where the 2degrees business has a right to play," Callander says.
In fixed-line broadband, the merged company has more heft from the get-go, as 2degrees' existing base of 135,000 customers is boosted by 210,000 from Orcon's stable for a combined 375,000.
That's enough scale to nip at the heels of Vodafone NZ (which has just over 400,000 fixed-broadband customers). Market leader Spark has around 700,000 fixed-line broadband customers.
The merger also brings extra punch at the consumer end of the fixed-broadband market through its all-local call centre operation (the approach favoured by both 2degrees and Orcon) and a wholesale power-up through the 4200km nationwide fibre network that Orcon Group brings to the merger.
And, combined with its ongoing mobile network upgrades, it will allow 2degrees to join the fast-growing fixed-wireless (or "wireless broadband") party with gusto for the first time, too.
"We'll have an increased focus on wireless broadband," Callander says. "We're in the middle of a 5G build programme. We've built-out over 100 sites. We've got all the main centres covered, but clearly putting as many customers as possible on our own networks is a key part of our strategic direction."
While the Big Two in fixed-line broadband have become the Big Three, there's no safe harbour for any of them. As the merger neared closure, Jarden head of research Arie Dekker said non-traditional players like Contact Energy, Mercury and Sky TV could grow to as many as 400,000 broadband connections over the coming years.
For 2degrees, the better news is that it now has a slice of the non-traditional action via its Orcon merger, which brings onboard a wholesale business that includes Sky Broadband.
Another complication could come through sharper elbows from Chorus. The old 2degrees was relatively diffident to the UFB fibre network operator as it entered regulator brawls with Spark and Vodafone NZ over their front-foot efforts to market wireless broadband (which cuts Chorus out of the picture). But Callander's enthusiasm for wireless broadband, underpinned by the 5G upgrade under way, could see 2degrees move into Chorus' crosshairs. Notably, while Chorus made a neutral submission on the merger, it noted that the 2degrees-Orcon deal would boost the market share of integrated fixed/mobile retail service providers from 68 per cent to 81 per cent - which it painted as a challenge to new separation of wholesale and retail operations that was established as the "new normal" when Telecom was cleaved in two.
Chorus may push this line harder in the months and years to come as it seeks to get fast-growing wireless broadband regulated. If so, expect Callander to go toe-to-toe. The telco veteran has three decades of regulatory sparring under his belt.
In more meat-and-potatoes terms, Callander says while exact arrangements are still being worked out, most staff in the combined operation will move into 2degrees' new headquarters in a new Mansons development in Fanshawe St in central Auckland (part of a wider Mansons complex that also includes buildings housing Spark and, as of this week, Chorus, in what has become something of a telco cluster. Sky TV - which recently sold its Mt Wellington complex for $56m - has moved into the old Vodafone HQ across the street.)
A post-lockdown setup sees 550 desks in 2degrees new space, with the expectation that most will be hybrid working, and only in the office two or three days a week. Most call centre staff will work from home permanently, Callander says.
In July last year, Voyage Australia (a joint venture between a Macquarie Group fund and Aware Super) bought (then) ASX-listed Vocus Group - whose stable included Vocus NZ, soon to be rebranded Orcon Group.
Voyage, in turn, proposed a deal where it would buy 2degrees and then merge it with Vocus Group's New Zealand operation, which had rebranded as Orcon Group.
On March 15, the Commerce Commission approved the Orcon Group-2degrees deal. It has also been approved by the GCSB. Overseas Investment Office approval followed soon after.
So, although the deal involves the merger of 2degrees and Orcon - and that's what it means in everyday terms - at its base, the transaction involved Voyage Australia buying 2degrees from its US majority owner, Trilogy International Partners.
In a May 20 filing, Trilogy said 2degrees' sale to Voyager had closed with an aggregate purchase price was $1.32b.
Trilogy, which held a 73 per cent stake in the Kiwi telco, received $935m. The balance went to 2degrees' minority shareholder, the Netherlands-based Tresbit.
Can the telco navigate through its perfect storm?